Making Offers No One Can Refuse: Effective Contract Drafting Part 5

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1 Fordham University School of Law From the SelectedWorks of Gerald Lebovits June, 2016 Making Offers No One Can Refuse: Effective Contract Drafting Part 5 Gerald Lebovits Available at:

2 Journal NEW YORK STATE BAR ASSOCIATION JUNE 2016 VOL. 88 NO. 5 Reasonable Compensation for the Individual Fiduciary Searching for a Definition Also in this Issue Mental Hygiene Hearings Arbitral Sanctions Estate Tax Marital Deduction Litigation Strategy and Dispute Resolution

3 THE LEGAL WRITER BY GERALD LEBOVITS Making Offers No One Can Refuse: Effective Contract Drafting Part 5 In the last issue of this five-part series, the Legal Writer discussed the different parts of the contract. In our final column on contract drafting, we discuss how to write contracts clearly and unambiguously. Writing Contracts Clearly and Unambiguously Aside from knowing the different parts of a contract, it s important to learn how to write contract provisions. Using plain English in contract drafting prevents future litigation. Contract provisions are made clear and unambiguous by omitting legalese, using readable and legible formatting, maintaining cogent sentence structure, avoiding ambiguous provisions, and deconstructing complex provisions. 1 Legalese Difficult, convoluted language will confuse non-lawyers who read the contract. Drafters sacrifice clarity if they use legalese. Legalese is arcane and formal language. 2 Examples: whereas, hereinafter, hereby, abovementioned, therefore, witnesseth. 3 Legalese is deceptive; it makes provisions look precise when they re unclear. 4 Even words like herein create ambiguities. 5 Writing ambiguous archaisms into contracts is client abuse, colleague abuse, judge abuse, and bad public service. 6 Avoid legalese entirely. Contract drafting is about regulating conduct and stating facts. Avoid words associated primarily with expository, narrative, and persuasive prose words such as therefore, because... and furthermore. 7 Using plain language is the most effective way to draft a clear contract. Plain language means language that s clear and effective. 8 It s harder to simplify an idea than to complicate it. 9 Although time-consuming to formulate, your use of plain language will enhance all readers comprehension. 10 Additionally, simple language reflects values of honesty, integrity, and trustworthiness. 11 These values will help opposing parties feel comfortable negotiating with you. 12 Some contracts use couplets and triplets, which are often redundancies: acknowledge and confess, aid and abet, by and between, all and every, convey and transfer, and final and conclusive. 13 These should be cut down to one word, unless there re substantive differences in the two words, such as represent and warrant. 14 Avoid pretentious words. Replace them with ordinary words that aren t verbose. 15 By reason of, for example, can be replaced with because. 16 Other examples, where the first phrase is pretentious and could be replaced by a second, more appropriate word, are effectuate carry out ; endeavor try ; consequence result ; for the duration of during ; and notwithstanding the foregoing despite. 17 Only a small part of a contract needs technical terms. 18 One way to use technical terms is through defined terms, a common drafting technique to enhance clarity. Most contracts contain provisions that define a term in the context of the contract. 19 Don t use terms of art in a contract without defining them first. Terms of art are [a] word or phrase having specific, precise meaning in a given specialty, apart from its general meaning in ordinary contexts. 20 The parties involved and other readers of the contract might not be familiar with these terms. 21 Some examples of terms of art: right Using plain language is the most effective way to draft a clear contract. of first refusal, res ipsa loquitur, and after-tax earnings. Don t assume that your reader knows what these terms mean. If additional information is required, attach it as an exhibit. Consistency is key. The words contract and agreement are interchangeable: They mean the same thing. Whichever word you choose to use, use it consistently throughout your document. 22 Clarity Through Format To ensure usability and clarity, contracts require an artist s touch. 23 Even if the substance of a contract is perfect, [t]he formatting of a provision can influence the outcome of a dispute. 24 A clear and well-organized contract allows the parties, and a court as well, to understand the document and quickly find all relevant information. Some writing techniques help achieve contract clarity: short sentences, active voice, logical organization, consistency, legible formatting, and descriptive headers. 25 Continued on Page June 2016 NYSBA Journal

4 The Legal Writer Continued from Page 64 Break complex sentences into different sentences and tabulate them. 26 You can tabulate when a sentence has the same introductory language. Example: Seller represents and warrants: (a)... (b)... (c).... When tabulating, grammar determines the punctuation. The introductory language should include all words common to each tabulated section and, when joined with the tabulated or listed sentence, must form one complete and parallel sentence. 27 Use a font that a reader won t notice. 28 Most contracts are single spaced and in nothing smaller than size 12 font. 29 The margins should leave enough space for comments and other markings. 30 Avoid unnecessarily long paragraphs. 31 Long paragraphs not only make agreements harder for opposing parties to understand, but you ll often find yourself struggling to dissect a contract long after you drafted it. 32 Clarity Through Sentence Structure Simple sentences will make contracts accessible to all readers. 33 Each sentence has a subject, verb, and object that convey the sentence s essence. 34 Example: The contractor shall build the house in Rochester, New York. This sentence is in the active voice: the contractor is the subject, shall build is the verb, and house is the object. Keep the subject, verb, and object together as closely as possible. 35 Don t cut it up, such as: Contractor, if it gets paid by Buyer, shall build the house. Instead, write that If Buyer pays Contractor, Contractor shall build the house. Don t use the passive voice. Doing so avoids directly stating who s doing what to whom. 36 Putting that sentence in the passive voice would be: The house shall be built by Contractor. The passive voice might even drop the active voice s subject, confusing the reader about who will perform the obligation. Example: The house shall be built. Unlike the passive voice, which is weak, wordy, and often indefinite, 37 the active voice outlines the parties responsibilities with clarity. 38 Eliminate every sentence using passive voice. A sentence should be written in the passive voice only if there s a good reason to do so, such as if the party does not know who the actor is or will be. 39 Ambiguities A precise contract has no ambiguity. 40 The contract shouldn t have any provision or term that could lead different contracting parties to attach different meanings to it. 41 Your job as a contract drafter is to consider the manner in which drafted language can be ambiguous and to plug the holes. 42 One wellknown example of contract ambiguity is the case Frigaliment Importing Co. v. B.N.S International Sales Corp. 43 In that case, the dispute arose over the term chicken. The court found chicken ambiguous because the contract did not specify what type of chicken was expected. 44 Frigaliment thought that chicken meant a broiler, while B.N.S. thought that chicken meant any type of chicken. As a result of this ambiguity, B.N.S. delivered Frigaliment stewing chickens, which are unsuited for broiling. After Frigaliment received chickens inferior to what it had expected, it sued B.N.S. for breach of contract. This entire dispute could ve been avoided had the parties lawyers included a more precise description of what was expected in the shipment. A simple, effective way to identify any ambiguities in the contract is to read the document multiple times and consider if others would find the terms ambiguous. 45 It s helpful to have someone without any stake or experience in the matter read the contract; that reader can find ambiguities you missed. 46 A disinterested reader might spot ambiguities that eluded you after you spent so much time drafting the agreement. 47 When you can justify the time and expense, it might also help you to question multiple readers to see whether the contract conveys its intended meaning. 48 These outside readers might include other lawyers at the firm, paralegals, or even the client. Although the general rule in legal writing is to avoid ambiguities, some- times the lawyer might choose to use purposely vague terms. 49 Terms or phrases like good cause, gross negligence, and material adverse effect are useful because the court Don t use the passive voice. can interpret them in different ways. 50 This might be a helpful technique if there s a fear that an impasse will occur between the parties. If a lawyer knows that resolving ambiguities will endanger negotiation, it might be beneficial to make these terms vague and have a court decide their meaning later. 51 It s important to avoid confusing these purposely vague terms or phrases with actual ambiguities in the contract, though. 52 Ambiguity allows for a provision to be interpreted multiple ways but is usually unintentional and preventable. 53 Use general terms when the parties need flexibility. Using terms or phrases like substantially perform and properly package, for example, won t create ambiguities but, rather, will provide latitude to the performing parties. Many drafters also prefer genderneutral language to masculine or feminine if the author intends to cover both. 54 For example, to accomplish gender neutrality, refer to the transfer of shares instead of his shares or his or her shares. 55 When deciding whether to use ambiguous terms, consider the parolevidence rule, which provides that a writing intended by the parties to be a final embodiment of their agreement cannot be modified by evidence of earlier or contemporaneous agreements that might add to, vary, or contradict the writing. 56 The parol-evidence rule prevent[s] a party from introducing extrinsic evidence of negotiations that occurred before or while the agreement was being reduced to its final written form. 57 Drafters should tread carefully when choosing to write ambiguously or unambiguously. A court that deems a disputed term unambiguous NYSBA Journal June

5 will use the parol-evidence rule and not consider extrinsic evidence in reading the contract terms. Conversely, only if there s an ambiguous term or provision and extrinsic evidence might give insight into the drafter s intent may a court consider rule because it contradicts the final agreement. 66 And/Or Ambiguities Lawyers drafting contracts must often decide whether to use and or or when listing multiple entities in Be aware of how courts interpret contracts. that extrinsic evidence through contract interpretation. There re benefits and disadvantages of ambiguity versus unambiguity. Just be sure to choose the language that ll serve your client best. To ensure that these issues in the contract never go to court, you should practice preventive law to cover all your client s bases. 58 The lawyer can attain that goal by asking questions before the contract is signed: (1) How can I protect my client against a later offer of parol evidence to supplement or contradict the agreement?; (2) What customs and usages of trade may be assumed to be part of the parties agreement? 59 It s in your client s interest to ask these questions to assure that you have a final contract that s the parties complete agreement. When the judge finds that portions of the contract are ambiguous, evidence may be offered to supplement the contract but not contradict its terms. 60 This might or might not be a good thing for your client. Consider the two following variations of an agreement between a lessor and lessee of a car wash: Lessee may elect to pay for the water upon such terms and conditions as the parties may mutually agree, 61 or Lessee shall pay for the water weekly. 62 In the first example, the agreement is incomplete about the payment term. 63 Consequently, parol evidence may be admissible to show the parties agreement about the payment. 64 With the second terse provision, the parties are more constrained: [T]he lessee [can t] introduce evidence to prove that the parties agreed to monthly payments. 65 This evidence would be inadmissible under the parol-evidence a statement. The first step is to understand the difference between the two words. 67 And refers to a set in its totality, 68 while or is a choice between members within a set. 69 When drafting a sentence that includes a set of entities, ask whether you intend to include all the entities or just a few from the group. Keep this in mind when determining which word to choose. Also, you might want to mean A or B, or both. In this situation, don t fall into the lazy trap of using and/or in the contract. It might confuse the reader. When you want to show that and is several or that or is inclusive, don t use and/or. 70 Consider substituting it with any or one or more. Rules of Interpretation Be aware of how courts interpret contracts. Rules determine the parties intent when their actual intentions are unknown or disputed. 71 A good drafter should value the rules of interpretation in mind as an important part of the legal landscape that courts and other decision makers will consider when deciding what a contract means. 72 The rules are best understood as guidelines rather than strict rules to help the writer minimize uncertainty in predicting how an agreement will be applied and interpreted. 73 This ll also be important when you re reviewing a contract written by another lawyer. For example, courts will generally construe ambiguous contract terms against the agreement drafter. This rule, known as contra proferentum, applies in many jurisdictions only when one contracting party is in a superior bargaining position, usually either as a result of greater experience or the assistance of counsel. When parties are in equal bargaining positions, courts will look to the parties course of conduct during the contract negotiations and the contract term to determine intent. Courts also look toward the structure and diction of provisions using rules known as Canons of Construction. Ejusdem generis, or of the same kind, attains the meaning of a word by looking at other words used with it. 74 Example: Consultant shall not operate any vehicles while on the Premises, including [without limitation] sedans, trucks, jeeps or vans. 75 In this example, the meaning of any vehicles will be based on what s expressly listed. 76 Expresio unius est exclusion alterus, or the expression of one thing is the exclusion of the other, provides that when something is expressly stated, everything not stated is excluded. 77 Example: Seller shall pay for the costs associated with the Litigation, including each of the following to the extent relating to the Litigation: the fees of Buyer s legal counsel; the costs of reproducing discovery documents; and the costs of filing court papers. 78 In this example, the seller won t have to pay for fees paid to the expert witnesses. Other rules of interpretation include the preference for finding a right to arbitration, the preference for finding an obligation rather than a condition, and an implied covenant of good faith. 79 Categories of Language Each clause in a contract will fall under the following languages: performance, obligations, prohibitions, discretion, declaration, policy, and exception. Below are some tips on how to draft provisions according to the language. Language of Performance Language of performance deals with actions parties [take]... by virtue of entering into a contract. 80 Although obligations create a duty for the parties to do something, language of performance accomplishes the act itself. The simple present tense or the word hereby signals performance language. 81 There s no need to use shall in language-of-performance 58 June 2016 NYSBA Journal

6 provisions. Language of performance should always be in the active voice. Take the sentence, Licensor hereby grants to the Licensee a non-exclusive worldwide license to use the Product. 82 Without the word hereby, the sentence is still one of performance language. This sentence gives the licensee the right to use the product because the parties entered into the contract. By contrast, take the sentence Licensor shall grant to Licensee a non-exclusive worldwide license to use the Product. 83 This indicates that the licensor should take an action before the licensee has the right to use the product. Using a simple present verb or the word hereby ensures that the contract itself conveys a right. Language of Obligation Obligations and prohibitions address what a contract party must do or is forbidden to do under the contract. 84 Use shall for obligations and shall not for prohibitions. 85 Don t use will. Will conveys futurity or possibility. 86 Save must for conditions. To ensure that you re using the proper word, substitute shall for hereby has a duty to and shall not for hereby has a duty not to. Don t use is entitled to. 87 This phrase is analogous to provisions in the passive voice. 88 It can create an ambiguity about the by-agent and is also wordy. 89 Instead of using is entitled to, use language indicating which party owes the duty. 90 Discretionary Language Discretionary language deals with what a party is permitted to do under a contract. 91 It s often used to create an exception to a prohibition. Example: Larry shall not go to the movies this week; except that Larry may go to the movies on Wednesday this week. The word may here indicates an exception to the prohibition against going to the movies this week. 92 Additionally, the word may can be used to convey what a party is entitled or permitted to do. 93 Generally, it s unwise to use discretionary language if the action you re permitting the other party to do isn t otherwise prohibited. This would give the opposing party a contractual right from thin air. Because may can be interpreted in different ways, try substituting may for is permitted/entitled to, and use except for exceptions. Language of Exception and Subordination Language of exception and subordination includes words or phrases like except, subject to, notwithstanding, and except as otherwise provided in. 94 These words and phrases indicate that a particular action or item isn t included in the contract. Exceptions may be localized or broad. 95 Examples of broad exceptions: except as otherwise permitted under this agreement and except as the parties have otherwise agreed or might otherwise agree. 96 An example of a localized exception is subject to this section. Take a localized approach to exceptions. 97 Language of Policy Language of policy is necessary to define rules. 98 There re two different types of policy language. 99 The first is language that states the rules governing a given thing, event, or circumstance. 100 Example: Any attempted transfer in contravention of Section 2.1 will be void. The second is language addressing the scope, meaning, or duration of a contract or provision. 101 Example: This agreement terminates on December 31, 2013, at 5:00 p.m. Plattsburgh, New York, time. These provisions are used to convey definitions, rules of construction, contract interpretation, and procedures for a court or an arbitrator to enforce a contract. Use the present tense for policies that apply to the effective date of the contract and will for policies relating to future events that might or might not take place. 102 Make sure not to use shall for rhetorical emphasis when describing the rules of the game. Never write something like Property Bill shall mean the Property Bill of 1997, as amended. That would be an attempt to obligate the Property Bill to do something. A bill can t do anything. It s an inanimate object. Language of Declaration The language of declaration is used for statements of fact, or declarations, to which the parties agree. It s akin to a stipulated fact in a lawsuit. 103 A statement like The purchase price is $500,000 is a declaration. The language can be divided into representations and warranties as well as acknowledgements. 104 Representations and warranties using language of declaration are assertions of truths that induce the other party to enter into a contract. Acknowledgements using language of declaration are statements that a party accepts as true. Acknowledgements align intentions and serve as an estoppel on both parties. Example: ABC Co. acknowledges that XYZ Co. pays its workers in bars of chocolate rather than in generally recognized currency. Conditional Language Conditional language modifies language of obligation, of discretion, of prohibition, and of policy. 105 Three components make up a condition: a conditional clause, a subordinator, and a matrix clause. 106 The conditional clause expresses the direct condition. 107 The subordinator describes the relationship between the conditional and matrix clauses. The most common subordinator terms are as long as, until, and unless. The matrix clause is the consequence of fulfilling the condition in the conditional clause. 108 Let s look at the following conditional sentence: The law student shall stay at school and work this evening unless the test is not tomorrow. The conditional clause is the test is not tomorrow, the subordinator is unless, and the matrix clause is the law student shall stay at school and work. A conditional sentence controls the flow of other contract language. It s important not to use shall in the conditional clause; shall indicates an obligation, not a condition. Additionally, the word if is a binary NYSBA Journal June

7 concept, [meaning that] the language in the matrix clause will apply to its full extent if the language in the conditional clause is true. 109 On the other hand, the phrase to the extent that is a sliding-scale concept, [meaning that] the language in the matrix clause will apply to varying degrees. 110 An example of what not to do: To the extent that the Company is a public corporation, Company shall file all applicable reports required by the Securities and Exchange Commission. The phrase provided that should be avoided when creating a condition: It can be construed as an exception, a limitation, or a condition. 111 To recap, here re a few quick tips to remember when drafting a contract: Unambiguous is better than ambiguous, concision is better than redundancy, predictability is better than uncertainty, plain English is better than legal jargon, precision is better than vagueness, and consistency is better than inconsistency. n Gerald Lebovits (GLebovits@aol.com), an acting Supreme Court justice in Manhattan, is an adjunct professor of law at Columbia, Fordham, NYU, and New York Law School. For their research, he thanks judicial interns Katrina Borra (NYU), Anne Easton (NYLS), Ryan Jerome and Dilshat Shalumov (Fordham), Tamar Rosen (Binghamton), Elizabeth Sandercock (CUNY), and Ian Steinberg (Cardozo). The Journal congratulates Justice Lebovits on his election by the students at Fordham University School of Law as Adjunct Teacher of the Year for He was previously elected Adjunct Professor of the Year at St. John s University School of Law and at New York Law School. 1. See Tina L. Stark, Drafting Contracts: How and Why Lawyers Do What They Do 255 (2d ed. 2014). 2. M.H. Sam Jacobson, A Checklist for Drafting Good Contracts, 5 J Ass n Legal Writing Directors 79, 108 (2008). 3. Stark, supra note 1, at Jacobson, supra note 2, at See Duke McDonald, The Ten Worst Faults in Drafting Contracts, 11 Scribes J. Legal Writing 25, 26 (2007). 6. Id. 7. Kenneth A. Adams, A Manual of Style for Contract Drafting 8 (3d ed. 2013) (Adams I). 8. James P. Nehf, Writing Contracts in the Client s Interest, 51 S.C.L. Rev. 153, 164 (1999). 60 June 2016 NYSBA Journal 9. Id. 10. Id. 11. Gregory M. Duhl, The Ethics of Contract Drafting, 14 Lewis & Clark L. Rev. 989, 1033 (2010). 12. Id. 13. Stark, supra note 1, at Id. 15. Id. at Id. 17. Id. 18. Nehf, supra note 8, at William K. Sjostrom, Jr., An Introduction to Contract Drafting 41 (2d ed. 2013). 20. Black s Law Dictionary 1700 (10th ed. 2014). 21. See Jacobson, supra note 2, at 86, Barbara Child, Drafting Legal Documents: Principles and Practices 115 (2d ed. 2001). 23. Jacobson, supra note 2, at Vincent R. Martorana, An Initial Thought on the Impact of Formatting and Contract Psychology, Drafting Points (Jan. 29, 2013), (Martorana I). 25. Sjostrom, supra note 19, at See Stark, supra note 1, at Id. 28. Charles M. Fox, Working with Contracts: What Law School Doesn t Teach You 166 (Prac. L. Inst. 2d ed. 2013). For more information about fonts, see Document Design: Pretty in Print Part 1, 81 N.Y. St. B.J. 64 (Mar./Apr. 2009); Document Design: Pretty in Print Part II, 81 N.Y. St. B.J. 64 (May 2009). 29. Fox, supra note 28, at Id. at Id. 32. Id. 33. Jacobson, supra note 2, at Stark, supra note 1, at Id. at 269; see Jacobson, supra note 2, at Jacobson, supra note 2, at McDonald, supra note 5, at Id. 39. Id. 40. Nehf, supra note 8, at See Sjostrom, supra note19, at Deborah B. McGregor & Cynthia M. Adams, International Lawyer s Guide to Legal Analysis and Communication in the United States 314 (2008) F. Supp. 116 (S.D.N.Y. 1960). 44. Id. 45. Nehf, supra note 8, at Id. 47. Id. 48. Id. 49. Id. at Id. 51. Scott J. Burnham, Drafting Contracts (Teacher s Manual) 29 (2d ed. 1993). 52. Nehf, supra note 8, at Id. 54. See Jacobson, supra note 2, at Nehf, supra note 8, at Black s Law Dictionary 1292 (10th ed. 2014). 57. Id. 58. Scott J. Burnham, Drafting and Analyzing Contracts 79 (3d ed. 2003). 59. Adapted from id. at See id. at Adapted from id. at Adapted from id. 63. Id. 64. Id. 65. Id. 66. Id. 67. Stark, supra note 1, at Vincent R. Martorana, Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider, PPT slide 126 (N.Y. St. B. Ass n, CLE, Feb., 2015) (Martorana II). 69. Id. at Burnham, supra note 58, at Id. at Id. 73. Id. 74. Vincent R. Martorana, Supplemental Outline, The Nuts and Bolts of Contract Drafting: From Basic to Advanced Topics 97 (N.Y. St. B. Ass n, CLE, June 2015) (Martorana III). 75. Id. 76. Id. 77. Id. 78. Id. 79. Id. at Vincent R. Martorana, Supplemental Outline, Fundamental Concepts in Drafting Contracts: What Most Attorneys Fail to Consider 7 (N.Y. St. B. Ass n, CLE, Feb., 2015) (Martorana IV). 81. Kenneth A. Adams, Legal Usage in Drafting Corporate Agreements 18 (2001) (Adams II). 82. Martorana II, supra note 68, slide Id. 84. Martorana IV, supra note 80, at Adams II, supra note 81, at 22, Id. at Adams I, supra note 7, at Id. 89. Id. 90. Id. at Adams II, supra note 81, at Id. 93. Martorana II, supra note 68, slide Martorana IV, supra note 80, at Id. 96. Id. at Martorana III, supra note 74, at Adams II, supra note 81, at Id Id Id Id Charles M. Fox, Teaching Contract Skills to Young Lawyers, ABA Annual Meeting Section of Business Law 32 (2006) Martorana II, supra note 68, slide Adams II, supra note 81, at Id Id Id Martorana IV, supra note 80, at Id Id.